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Interest rates are not tied to economic growth – L&G

Paul Robertson
Written By:
Paul Robertson
Posted:
Updated:
30/10/2014

The UK is likely to remain in a low interest rate environment independent of the UK economy and Gross Domestic Product (GDP), as the two are independent, Legal & General has said.

In a Fundamentals Briefing, Christopher Jeffery, strategist with L&G Investment Management, noted that long dated forward interest rates in the UK, US and euro zone have dropped over 100 basis points over the last three quarters.

However, he argued that the rates should not be viewed as an expectation of lower trend output growth as the two were not wholly connected. He said: “This is one interpretation, but it is not the best.”

He noted that long term consensus growth expectations have been stable since the 1990s, at around 2.5 per cent per annum and that real rates have been well below GDP growth.

He added: “In addition there is nothing in economic theory that the two should be tied together.”

Pointing to the fact that there had been no drop in yield on global equities corresponding to a decline in interest rates, Jeffery said the increase in saving for emerging markets had had offset the decreasing propensity to invest in advanced economies.

The two combined to drive down the cost of capital but had left the rate of capital formation essentially unchanged.

“Declining termional interest rates do not signal economic decline,” he said.